A Socially Conscious Business is still a Business
March 19, 2011 3 Comments
I’ve been struggling to get my head around (and approve/dismiss) the concept of socially conscious businesses for a while. Socially conscious businesses are those who claim to conduct business and sell products in a way that does not negatively impact consumers, employees, and the environment. All right seems nice, but what does that entail? How are these businesses able to improve working conditions and manufacturing processes (adding to a firm’s costs) while still selling goods at prices consumers will pay? Business won’t exist for long if they aren’t making a profit. In Wealth of Nations, Adam Smith sums it up perfectly: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.” Companies cannot act altruistically and sell products at market price (below their cost). Well turns out they don’t have to remain competitive in price compared to others, and economics can tell us why.
Consumers across the market for a product are believed to have unique (yet sensible) preferences. More is preferred than less, and cheaper is better than more expensive. However consumers will pick the cheapest good only when the goods are completely identical. This is hardly ever the case; laundry detergents have different brands, car models have varying features, and televisions come in different sizes. The above lists examples of differentiated products. Just as many consumers prefer Tide to generic detergent, shoppers can be led to purchase a more expensive item as long as they believe the pricier item contains more value. Value can come in a variety of forms: better quality, more appealing packaging, assumed reliability, and even satisfaction from purchase. Providing consumers with self-satisfaction is the key to socially conscious business. Socially conscious businesses won’t be able to sell their products if consumers are unaware of the philanthropy that the product brings to the world. Those businesses wishing to sell their goods (with purported added value) must therefore 1) make consumers aware of the difference between their product and that of their competition and 2) appeal to buyers such that they will select their product over others’.
The problem with socially conscious businesses is measuring consumers’ additional satisfaction from purchasing the differentiated, generally higher-priced product. How much will consumers pay to go to bed feeling like they changed the world? Will coffee drinkers spend $10 extra on free-trade products knowing that farmers are bargained with fairly? Economists can attempt to model consumer preferences to predict the ‘sweet spot’ to price a good, but not accurately. Therefore, socially conscious businesses should attempt to loudly make their intentions known and keep costs as low as possible.
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I think what it really boils down to is how much overhead do these socially conscious businesses have to add before they can no longer make the profits they see by charging the consumer an extra 25% above market price because it was done in a better working environment… I’m right there with you on the struggle to approve/dismiss the idea, but I’m starting to err to the side of total bullshit.
I agree with this strongly. The only way to actually ensure that businesses will strive for lowest cost and best quality (which in fact is the only way you are actually doing what is best for the consumer) is for people to be in competition to be the top product. Other ideas may sound nicer and may be “ideal”, but the real world has proven time and time again that acting out of self-interest is the ultimate way to get businesses to operate at maximum efficiency and lowest cost, and thus in the best interest of the public.
Social consciousness in terms of business should reference two things in my opinion. One is in terms of industry’s where this is most relevant — for example coal and gas and trash companies that are effecting the environment — , and two is in regards to charity. Certainly all major businesses should be involved heavily in charity and community programs. However, as you said, their true impetus must be for profit and in the spirit of competition, not driven simply by the idea of “social consciousness”
I have never quite understood this idea… granted I still don’t know how I feel about the subject. Of course, if everyone ran a socially conscious business that would be fantastic. But it doesn’t seem possible. Businesses should strive for the lowest cost and best quality to make a profit and be in competition. Being socially conscious doesnt lend itself well to being low cost, so then you increase the prices and hope to make a profit. People are not going to be able to buy. Yeah, we can afford a pair of Toms shoes and feel good about the purchase knowing that the price is high because it is going to charity, but it is unrealistic to think that this can work for every business and product.